Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-09T22:57:24.289Z Has data issue: false hasContentIssue false

OPTION PRICING VIA MONTE CARLO SIMULATION

A WEAK DERIVATIVE APPROACH

Published online by Cambridge University Press:  27 July 2001

Bernd Heidergott
Affiliation:
EURANDOM, 5600 MB Eindhoven, The Netherlands, E-mail: [email protected]

Abstract

Using a weak derivation approach to gradient estimation, we consider the problem of pricing an American call option on stock paying dividends at discrete times. Similar simulation-based sensitivity estimators were introduced earlier by Fu and Hu (1995) who used smoothed perturbation analysis. We improve upon their results by presenting an estimator with a uniformly lower variance. In addition, we reduced the multidimensional optimization problem of pricing an option with multiple ex-dividend dates to a one-dimensional one. Numerical examples indicate that this approach saves a considerable amount of computation time. Our estimator holds uniformly for a class of payoff functions, and applications to other types of options will be addressed in the article.

Type
Research Article
Copyright
© 2001 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)